We're now four days into the new financial year – the ASX having delivered a 17.4% return, including dividends over the past twelve months. Added to the prior year's gain, an investor who achieved the market average return has seen their wealth swell by 44% in 24 months.
It's almost – almost – enough to make you forget about the pain and anguish of the GFC. Certainly markets are in an optimistic mood – new floats seem to be hitting the market almost every week, and companies are wheeling and dealing in ever greater numbers, with merger and acquisition activity hitting levels not seen since last millennium.
And that's reflected in the market's mood.
From euphoria to pessimism and back
Two years ago, bad news was terrible, good news was bad and great news earned a shrug of the shoulders. Greece was going to hell in a handbasket, the US was in an intractable recession and the mining bust was going to be the end of us.
These days, the share market has hardly noticed Ukraine, Iraq, slowing Chinese growth or tepid corporate profit growth – it's full steam ahead for investors, who've enjoyed that almost 50% two-year gain and are in a significantly happier mood.
The market is a moody and unpredictable beast… except that its moodiness is completely predictable! No, you can't forecast when, or by how much the market will overshoot, but it always does, in both directions, as sure as night follows day.
Which of those two periods were right? The 'endless winter' or the 'everything is wonderful' phase? Probably neither – things are never so bad, or so good, as we imagine.
So as we head into this new financial year, here are some things to keep in mind.
Be prepared
There will be many predictions made. Remember that doom and gloom sells, so those are the ones that'll be given the biggest headlines and the highest rotation on the business news. And for every prediction of doom, there'll be a prediction of a boom. Ignore them… the success rate of pundits tends to be indistinguishable from a coin toss.
Forecasters always group around the average. You don't lose your job for guessing that the market will return about average. If you're wrong, at least you'll have plenty of company. Being outlandish is never a good career move. But there's a corollary:
Beware the forecaster who has nothing to lose. Eventually, he or she will guess right, then dine out on that (and earn a lot of money on the speaking circuit) for many years. In the meantime, they'll be spectacularly wrong.
It's a rare market that moves in a straight line in either direction. "The trend is your friend", they say. That's true… until it ends.
The laws of gravity don't always apply to financial markets. What goes up can keep going up… but not necessarily. Looking for trends and patterns can be dangerous.
It's always easy to explain what the market is doing… in hindsight. The future is never so clear, and the things that make the market jump or slump are usually from left field anyway. And finally…
Never, ever fall for the trap of believing that the market is efficient and rational. If it were, the GFC would never have happened, nor would the tech boom. Booms and busts happen precisely because the market is irrational.
Foolish takeaway
The stock market can seem scary, unfathomable, difficult and stacked against you. There are many 'helpers' who'll only too happily reinforce those notions then offer to help you… for a hefty fee.
Despite assumptions to the contrary, successful investing hasn't been helped by the internet, lower brokerage and a deluge of data and opinions. There's a reason Warren Buffett moved from New York to his hometown of Omaha, Nebraska, and doesn't have a computer on his desk!
Successful investing is buying quality businesses at attractive prices, then letting management do its work, only selling when you lose faith in the company or the shares are significantly overvalued. It's simple, but it's not easy, so controlling your temperament should be your New Financial Year resolution.
